BY JOE BRISBEN
In the early autumn of 1666, Sir Isaac Newton left Cambridge University to visit his mother in Lincolnshire, England. One afternoon, as he was walking through the garden, he happened to see an apple fall from a tree.
Hmmm, he thought while watching this everyday occurrence, and his keen, analytical mind came up with his theory of gravity, which, simply stated, is “What goes up must come down.”
As I write this column, in August 2007, the Dow Jones Industrial Average has just set a new record and crossed the 14,000 threshold. Every time the Dow crosses a round number like that, some people worry about the Dow being too high. They say, “What goes up must come down!”
In a way, I cannot blame them. Anyone who experienced the stock market crash of 1929 and the Great Depression that followed knows what it is like to have the economic rug ripped out from under them.
Even those who did not personally experience those times have seen photographs and films of the bread lines, the soup kitchens, the apple stands, and people looking for work and standing in long lines.
A sidewalk ran in front of a house where I once lived. Stamped in some of the blocks of that sidewalk were the letters WPA. That stands for Works Progress Administration, a federal government program in the 1930s that put people back to work by improving their communities with public projects.
However, 1929 is not 2007. During those 78 years, the federal government has created the Securities and Exchange Commission (SEC) and a raft of laws and triggering mechanisms to protect investors.
Companies that trade in investments have formed the National Association of Securities Dealers and the Financial Planning Association that register brokers and financial planners. They publish lists of those who have broken the rules and who have been disciplined or lost their licenses.
In addition, such companies as Moody’s, Standard and Poor’s, and A.M. Best analyze companies and government agencies that issue stocks, bonds, and other investments so that we can have some reasonable idea of their safety.
Moreover, the problem with the application of Newton’s theory to investments is that they do not respond to gravity. A more fitting metaphor is stocks are like electricity. If earnings are like energy, the more they rise, the more a company glows.
If stocks are used prudently with the right management tools, insulation, circuit breakers, and wall sockets, then you can have light with which to read, enjoy air conditioning, listen to music, and watch television. Using it without the proper tools can give a careless person a shock.
I will not deny that the market can go down—sometimes drastically. Nevertheless, on the wall in my office is a history of the Dow Jones Industrial Average from its beginning in the 1890s to the present. I can see the crash of 1929, the great bear market of 1972-74, the crash of 1987, and the bear market of 2001-03.
What is sad about those recent periods is that people who should have been investing then did not do it. They need to make up for lost time. The older they are the fewer chances they will have to invest.
One cannot deny that the overall progress of the Dow has been up, from around 100 in 1929 to 14,000 this year.
We must realize that the stock market never moves in a straight line. Neither do the components that make up the broader averages: utilities, transportation, energy, industrials, pharmaceuticals, technology, etc. Groups move in cycles, stocks move in cycles, and often they are not in harmony with one another.
That’s why experienced investors say it’s always time to invest—in something. If you are ready to do some investing, see your friendly neighborhood financial advisor.